3.5 Long Term Incentive Plan (LTIP)

Grant levels

Conditional LTIP awards are made annually to executive directors. The maximum grant level under the LTIP is currently 200% of basic salary and it is anticipated that, in 2009, conditional grants under the LTIP will be made at 200% of basic salary for executive directors, including the chief executive. The Committee is content that the performance conditions that need to be satisfied for these awards to vest in full are sufficiently stretching in the context of the award levels. In determining annual award levels, the Committee also gives consideration to market competitiveness and has set the levels taking account of median expected value of long-term incentives relative to other companies of a similar size. These awards are discretionary and are considered on a case-by-case basis.

Performance measures

As in previous years, vesting of the LTIP awards made during 2008 is subject to the achievement, over a fixed three-year period, of stretching Group performance targets.

Half of each award is subject to a Group Total Shareholder Return (TSR) measure, while the other half is subject to a Group operating measure, currently return on capital employed (ROCE). These performance measures were selected on the basis that they foster the creation of shareholder value and their appropriateness is kept under review by the Committee. Taken as a whole, vesting depends on meeting a very challenging set of performance hurdles.

At the end of each performance period, the levels of TSR and ROCE performance achieved and the level of award earned is published in the subsequent remuneration report. There is no retesting of performance.

The LTIP closely aligns the interests of shareholders and executive directors by rewarding superior shareholder returns and financial performance and by encouraging executives to build up a shareholding in the Company.

Total shareholder return (TSR)

The Committee considers comparative TSR to be a suitable long-term performance measure for the Company’s LTIP awards. Executives
would benefit under this measure only if shareholders have enjoyed returns on their investment which are superior to those
that could have been obtained in other comparable companies.

The portion of each award that is based on TSR is measured 50% against the Sector Index and 50% against the constituents of the FTSE 100. Maximum vesting of the TSR element of an award will be possible only if Anglo American outperforms by a substantial margin both the sector benchmark (as described below) and the largest UK companies across all sectors.

Sector Index comparison

One half of the TSR element of an LTIP award vests according to the Company’s TSR over the performance period, relative to
a weighted basket of international natural resource companies (the Sector Index). The Committee may amend the list of comparator
companies in the Sector Index, and relative weightings, if circumstances make this necessary (for example, as a result of
takeovers or mergers of comparator companies or significant changes in the composition of the Group). In calculating TSR it is
assumed that all dividends are reinvested.

For awards made in 2008, the companies constituting the Sector Index were as shown in Figure 2. Should the Tarmac group be sold or demerged during the performance period relating to this award, the percentage attributable to Industrial Minerals will fall to zero.

Target performance for the Sector Index is assessed by calculating the median TSR performance within each sub-sector category, and then weighting these medians by the category weightings shown above. That part of any award that is contingent upon the Sector Index element of the TSR performance will vest as shown in Figure 3. Shares will vest on a straight-line basis for performance between the levels shown in Figure 3.

Figure 3: LTIP – Sector Index comparison

The Company’s relative TSR compared with the Sector Index

% proportion of total TSR element vesting

Below Target

0

Target (matching the weighted median of the Sector Index)

20

Target plus 5% per annum

50

Target plus 7.5% per annum (or above)

75

FTSE 100 comparison

The vesting of the other half of the TSR element of an LTIP award will depend on the Company’s TSR performance over the performance period compared with the constituents of the FTSE 100 Index, as outlined in Figure 4. Shares will vest on a straight-line basis for performance between the levels shown in Figure 4.

Figure 4: LTIP – FTSE 100 comparison

The Company’s relative TSR compared with the FTSE 100

% proportion of total TSR element vesting

Below the median TSR of the FTSE 100

0

Equal to the median TSR of the FTSE 100

20

Equal to the 90th percentile TSR of the FTSE 100

50

Above the 90th percentile TSR of the FTSE 100

75

These targets were calibrated such that for the TSR element of the award there is approximately a 10% chance of achieving full vesting and a 25% chance of two-thirds vesting. These probabilities were assessed by PwC using the same Monte Carlo model used for calculating fair values of the LTIP under IFRS 2 (Share-based Payments). The estimated average fair value of an award under the TSR element is 50% of the value of shares awarded.

Graphs showing the Company’s TSR performance against the weighted average of the Sector Index and against the FTSE 100 for the five years from 1 January 2004 to 31 December 2008 are shown at Historical comparative TSR performance graphs.

Return on capital employed

Group ROCE is the second performance measure for LTIP awards. The Committee considers this to be among the most important factors which drive sustainable improvements in shareholder value in a natural resource business, as well as one of the most important measures of differentiation in performance in this sector.

The proportion of shares vesting based on Group ROCE will vary according to the degree of improvement in the Group’s average annualised ROCE over the performance period. Unless certain minimum targets for improvement in returns (on both capital employed for the financial year preceding the start of the performance period (existing capital employed) and on the additional capital employed during the performance period (incremental capital employed) are met, no shares will vest under this performance measure. The maximum ROCE targets are based on stretching levels of return on the existing capital employed.

The targets for the ROCE element of the 2008 conditional award are shown in Figure 5. To ensure that the targets do act as an effective incentive, they are adjusted for factors outside management’s control, such as movements in commodity prices, certain foreign exchange rate effects and capital in progress, as well as for relevant changes in the composition of the Group.

Figure 5: LTIP – ROCE targets

Existing capital employed

Incremental capital employed

Minimum ROCE Target

45.54%

10%

Maximum ROCE Target

47.54%

10%

The ROCE element of the award vests as shown in Figure 6.

Shares will vest on a straight-line basis for performance between the Minimum ROCE Target and the Maximum ROCE Target.